Garuda IPO Revises Flight Path

By Alison Tudor and Isabella Steger

Reuters

It’s always about politics.

The Wall Street Journal reported Wednesday that Indonesian state-owned airline PT Garuda Indonesia will, as widely expected, scale back the size of its initial public offering from 37% of the company to 24%, valuing it at around $500 million.

According to people familiar with the deal, the government had originally expected to raise over $1 billion, with a targeted price range of 750 rupiah to 1,100 rupiah (eight cents to 12 cents), a figure arrived at after a series of backroom meetings with politicians calling the shots. The chief consideration: not to be seen selling off state assets on the cheap. The shares were priced at 750 rupiah in the end.

Clearly, the company hasn’t fully shaken off the image that it’s still fundamentally a state-controlled entity. Writes the WSJ:

When Garuda in November restated its nine-month results to a profit from a loss, the company offered little explanation beyond an auditing “anomaly.” Later that month, hundreds of Garuda passengers were stranded without flights due to a glitch in the carrier’s new computer system.

However Garuda was also flying against a powerful headwind.

Together with the underperformance of the Indonesian stock market this year after 2010’s bull run, many foreign investors shunned the IPO because of the steep valuation, which would have made it twice as expensive as peers in the region.

While $2.3 billion flowed into Indonesian equities last year, about $403 million has flowed out in the second week of January alone.

Vanessa Donegan, head of Asia ex-Japan and global emerging markets equities at U.K.-headquartered Threadneedle Asset Managment Ltd., says investors have largely priced in the prospective growth of the Indonesian economy, but inflation is an ongoing concern as it could sap consumer spending and eat into profits at companies.

“People voted with their feet, taking profits in the Indonesian stock market,” she said. “Policy uncertainty has crept in, and it seems about time Bank Indonesia should raise rates.”

She added that the outflows from Indonesia are part of a broader trend of investors rotating out of emerging markets into more established north Asian markets and the U.S., but once the correction is over investors could return to Indonesia as the strong structural growth story is still intact.

Even then, there’s no guarantee that investors would necessarily be giving their vote of confidence to the aviation sector, which has long been dogged by safety and financial problems. Witness that only this month, budget airline PT Mandala Airlines, in which U.S. private equity firm Indigo Partners has a stake, grounded its fleet as it struggles to pay off debt.

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